Chapter 29

Consumption and Investment Schedules

Chapter 29 - The aggregate expenditures model

Investment demand - investment spending determined by the real interest rate!

Investment schedule - shows the amount of investment (Ig)forthcoming at each level of GDP!

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The investment demand curve and the investment schedule

Aggregate expenditures (AE) - for the private closed economy shows the amount (C + Ig) that will be spent at each possible output or income level!

DI = real GDP

Equilibrium GDP: C + Ig = GDP

Saving and planned investment are equal!

There are no unplanned changes in inventory!

Leakages = injections!

S = I

Other Features of Equilibrium GDP

If interest rate (i) rises, investment spending (I) will decline, by say $5B!

MPS = 0.25!

m = 1/MPS = 1/0.25 = 4!

Change in GDP due to the rise in investment spending of $5B = m * ∆I = 4 * $5B = $20B

Changes in Equilibrium GDP and the Multiplier

A net export schedule will show the net exports that will occur at each level of GDP!

Positive net exports increase aggregate expenditures and GDP!

Negative net exports decrease aggregate expenditures and GDP!

∆Xn = $5B!

m = 4!

∆GDP = 4 * $5B = $20B

Adding International Trade

G expenditure rises by $20B!

m = 4, ∆G = $20B!

∆GDP = 4 * $20B = $80B

Adding the Public Sector

Recessionary expenditure gap is the amount by which aggregate expenditures at the full employment GDP fall short of those required to achieve the full employment GDP!

Inflationary expenditure gap is the amount by which aggregate expenditures at the full employment GDP exceed those just necessary to achieve the full employment level of GDP

Equilibrium vs Full Employment GDP